Toolkit on LRED


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Toolkit on LRED

  1. 1. CONTENTSIntroduction............................................................................................................ 3CHAPTER 1: Laying the Foundations.................................................................. 5• Understanding the meaning of LED• Understanding what it means to prepare for and exercise LED• Knowing what processes are involved in constructing an LED Strategy• Knowing how to mobilise, research and assemble an LED Strategy• Understanding the possible components and variations within an LED strategyCHAPTER 2: Understanding the Policy Context for LED ................................. 19• Knowledge of the constitutional and statutory mandates for LED• Defining responsibilities of councillors for Local Economic Development – distinguishing the roles of councillors and officials in municipalities• Issues that district councillors need to be aware of in working to support LED• Understanding what district municipalities can do to stimulate the Local Economy by examining the extent and nature of what can be done to create jobs from the local level.CHAPTER 3: The Building Blocks of LED Strategies ....................................... 29• Understanding the local economy – its sectors and resources• Strategic choices which promote or hinder poverty and job creation• Identifying competitive advantage in the country, region, district and local municipality• Understanding concepts such as value addition, multipliers, leverage, backward and forward linkages, complementarities (of labour) and clustering.• Fleshing out opportunities for job creation and increased community involvement in infrastructure and private sector development e.g. subcontracting and tendering• Identifying the major blockages to investment and poverty reductionCHAPTER 4: Planning for LED ........................................................................... 49• The components of LED strategies• Strategic planning sessions – critical outcomes and decisions• Mobilising for participation and partnerships• Assigning territorial and sectoral roles across partners in LED processes• Using LED plans to improving public confidence in municipalities
  2. 2. CHAPTER 5: Drawing up Action Plans .............................................................. 69• Key Components of Action Plans• Foundations for Implementation:• Partnerships, Networking and Role Clarification• Resources• Management• Some Components of Action Plans: Intensification of Enterprise Support Sustainable Developmental Community Investment Integrated Development Programmes or IDPsCHAPTER 6: Vigilance is the Price of Prosperity ........................................... 113• Understanding the need for consistent and regular monitoring and evaluation• Building knowledge of sound M and E techniques• Deciding how to measure i.e. the complexities of measuring development• Assigning responsibility for data collection and analysis• Managing change processes in LEDCHAPTER 7: Funding the LED Process .......................................................... 139Range of financial mechanisms to different types of local economic development projects.Glossary of LED Terms ..................................................................................... 146LED Resources .................................................................................................. 150
  3. 3. Toolkit for Local Economic Development Page 3 IntroductionThis draft toolkit is designed as a practical set of resources to supportlocal government officials, councillors and LED practitioners.LED is a relatively new field internationally and it is even more recentin the South African context. The ideas and suggestions in this toolkittherefore tackle issues from a basic and fundamental point of view.In devising a framework and this toolkit, national government, inparticular, the department of provincial and local government, areacknowledging the need for all actors at all levels of South Africansociety to shape their environment and economic destiny. The natureof the challenges facing us suggests that creativity and innovation areneeded at all levels and from all groups in the country. Thus LED callsfor ‘all hands on deck.’The South African economy and spatial arrangements carry manyhangovers from the past which still need substantive attention andprogrammes if we are to build an equitable society. LED practitionersand planners in particular, will need to apply their minds carefully if weare to build equity and unleash opportunities.As this toolkit is the foundation for LED, it acknowledges that localplayers in an economy are best placed to determine appropriatestrategies to build and grow their economies. There are however a
  4. 4. Page 4 Toolkit for Local Economic Developmentmultitude of resources, both technical and financial which are availableto local governments. Chapter 7 points to number of these. Linked tothese resources is the notion that LED is integrally related to policiesof national and provincial government.The chapters and order of the text are designed to take practitionersand others through the logical steps in assembling and implementingLED structures and plans.One of the areas that is not dealt with in this toolkit is the substantivedifferences among city, town and rural economies. These differencesare alluded to though readers will need to unpack the specificities ofthese types of economies in practice.We wish you great creativity and success in assembling and testingyour LED interventions. Officials of dplg’s LED unit look forward toyour responses and comments.Comments can be sent to:Mr Alistair FraySenior Managerdplg535 Proes StreetPretoriaEmail: (012) 301-1058Fax: (012) 323-3550
  5. 5. Toolkit for Local Economic Development Page 5 CHAPTER 1 LAYING THE FOUNDATIONS • Understanding the meaning of LED • Understanding what it means to prepare for and exercise LED • Knowing what processes are involved in constructing an LED Strategy • Knowing how to mobilise, research and assemble an LED Strategy • Understanding the possible components and variations within an LED strategy
  6. 6. Page 6 Toolkit for Local Economic Development Roots of Local Economic Development (LED)The concept of local economicdevelopment arose in the context Globalisation is the process throughof globalisation. As trade expanded which trade barriers have been reducedacross the world, many producers of allowing goods and services to be traded more freely around the worldgoods and services faced competitionfrom producers and countries thatwere able to provide goods and services at lower prices and sometimes betterquality. Globalisation brings both opportunities and threats. The opportunities liein expanding trade beyond the boundaries of local and regional and nationalboundaries through competitive production techniques, value addition to localproduce and innovation in local economies. The threats lie in our ability to adapt toglobal economic forces and in having to produce goods and services at costs whichcan compete on international markets. This means that the technology used andstandards of production need to meet international requirements. South Africa is a young democracy that has a conservative economy historywhich led to our economy being strongly rooted in commodities (e.g. minerals andagricultural produce). While we do have some competence in the motor industryand other forms of manufacturing, we still need to work on being more stronglycompetitive at an international scale. During the apartheid era, the majority ofpeople were deprived of land, skills and opportunities to establish businesses. As aresult, we still face deep rooted challenges in re-building the economic competenceof the country. Some of our disadvantages are that labour in South Africa is not highly skilledand machinery and equipment sometimes have to be imported. Skilled labourand equipment together build productivity which enable industries to compete.Furthermore, currency fluctuations and a weak Rand can imply that imports canincrease in price which then increases productions costs. In adopting LED as a strategy, the South African government is encouraging peopleat all levels of society to participate in economic decision making which explorescreativity and builds entrepreneurship at Currency Fluctuations refers to theall levels of society. Given the challenges rise and fall in the value of the randthat we face in job creation and poverty against other currencies.eradication, LED builds a platform forbringing ‘all hands on deck’ in working towards solutions. It is an acknowledgementthat creativity, innovation and involvement of all groups are needed and can
  7. 7. Toolkit for Local Economic Development Page 7contribute to solutions. Another important reason for adopting LED as a policy is the push to democratiseat all levels. LED can be described as Decentralisation refers to functionsa decentralisation mechanism which of government being handed overallows local and regional governments other tiers of government, e.g. local orand their communities (business, provincial governmentlabour and society) to shape theirenvironments, improve competitiveness in their local economies and ensure thatinfrastructure and services work well for industry and society. By adopting LEDstrategies people in a local economy can work out ways of attracting investment togrow the local economy and also start businesses which will retain income in theirarea. In Chapter 2 we will explore the policy context for LED in South Africa in moredepth. What is local economic development (LED)?As we implied above, LED recognises that people, business and governmentsat local levels are best able to restructure economic situations that will stimulategrowth that is required to create jobs and thereby reduce poverty. In South Africait is important that LED processes work towards social and economic equality.Under apartheid, the majority of South Africans were deprived of skills andaccess to opportunities. This has led to widespread poverty and underdevelopmentamong black South Africa. Thus building equity in society is an essential aspect ofdevelopment processes. LED is the result of joint Private enterprise in a local economy includes all large medium, small and micro enterprises.planning by a municipality, This expanded view means that large miningits community and business companies and factories as well the smallestsectors. This means that all spaza shop or stall at a taxi rank is part ofeconomic forces in the local private enterprise in a local economy.situation have to be broughton board to identify resources, understand needs and work out plans to find thebest ways of making the local economy fully functional, investor friendly andcompetitively productive. As a starting point it is important to recognise the sources of income and wealthin society. Successful private enterprise and productive public-private partnershipscreate wealth in local communities.
  8. 8. Page 8 Toolkit for Local Economic Development A positive or enabling business environment means that infrastructural services must be reliable and that businesses must have convenient access to markets and essential inputs into the business. It is also important that the regulatory environment should be user-friendly. Suitable sites for business premises need to be available to encourage businesses to remain in or to make new investments in a local economy. Workers with the skills required for local sectors and industry within manageable distance are also an asset to the business environment. The safety of workers, raw materials and equipment in business are also important to encourage businesses to continue investing in an economy. It is important to recognise and cater for the support needs of business, i.e. financial services, business development consultants and other services that will enable businesses to become more efficient, productive and competitive. Private enterprise however, requires a positive business enabling environment todeliver prosperity.• Municipal government has a key role in creating a favourable environment for business development and success.• By its nature, local economic development is a partnership between the business sector, community interests and municipal government. ��������� ���������� ���������• LED is usually strategically planned by local government along with its public (other levels and agencies of government), private sector and community partners.
  9. 9. Toolkit for Local Economic Development Page 9 Investment is an important element of LED. It involves new investment by government and the private sector. Government investment would include construction of transport, power, water and telecommunications infrastructure. This creates a base for businesses and households to function well. Investment by businesses means that new factories/plants, mines, farms, service industries or trading premises are established, or new equipment is purchased. Both types of investment are essential foundations for growth. While businesses purchasing new equipment can lead to job creation, it can also lead to jobs being lost if new technology needs less labour. In the context of LED, it means that planners need to think of ways to attract new businesses to absorb the jobs that are lost. Businesses work to maximise profits and therefore planning for employment of people in a local economy is an important part of LED. Investing in skills and continuous learning in businesses is also essential for building and maintaining comparative and competitive advantage.• Implementation is carried out by the public, private and non-governmental sectors according to their abilities and strengths. GOVERNMENT Each parner in CO the LED process brings SS resources and has needs to be MM E fulfilled. LED plans capture the needs SIN and reflect how these needs will be met. UN BU ITI ES LED How to prepare for and effect LEDEach local situation has a different set of conditions that either improve or reducethe prospects for local economic development, and it is these conditions that Sharing a joint vision by all sectors is key to a successful LED Strategy
  10. 10. Page 10 Toolkit for Local Economic Developmentdetermine the relative advantage of an area in its ability to attract, generate andretain investment. A community’s economic, social and physical resources will guide the design of,and approach to, the implementation of a local economic development strategy. Tobuild a strong local economy, good practice proves that each community shouldundertake joint information gathering processes to understand the nature andstructure of the local economy. This should be followed by analyses of the area’sstrengths, weaknesses, opportunities and threats. This will serve to highlight thekey issues and opportunities facing the local economy. Economic Resources Combinations of land, minerals, skills and money Social Resources Organisations, NGOs and educational institutions Physical Resources Buildings and infrastructure as well as places of natural and historical interest Processes involved in constructing an LED StrategyIdeally, the development of an LED strategy will be an integral part of a broaderstrategic planning process for a sub-national region, city, town or rural area. Effectivestrategic planning ensures that priority issues are addressed and limited resourcesare well targeted. The stepped planning process should be tailored to complement,and correspond with, other local planning processes. The process is not rigid andshould be adapted to meet the needs of the individual community. ���������������������������������������� ���������������������� ���������������������������������� �������������������������������������������������������� ���������������������������������������������������
  11. 11. Toolkit for Local Economic Development Page 11 In South Africa this means that national, provincial and local plans and policiesshould be linked and complement each other. In South Africa there are ��������������������������� at least three types of local economies: cities, towns and rural areas. Each of these �������������������������������������������� types has different economic structures, resources and �������������� types of economic activity. The economies of cities usually have a complex �������������������������������������������������� and varied mix of mining, processing, services, tradeand industries. Towns may have mining, processing, trade and feeder industries intofarming or mining. Rural areas may be dominated by farming though there couldmines close by as well. The factors which differentiates cities, towns and ruralareas is agglomeration or density of population, and scale or extent of economicactivity. Mobilising for Research and Assembling an LED StrategyA community begins A community begins the LED strategy planning process byidentifying the people, public institutions, businesses, community organizationsand other groups with interests in the local economy. This is often led by the localgovernment, usually the mayor or city manager. The skills and resources that eachof these stakeholders bring to the strategy process provide important foundationsfor success. It is important that the individuals and organizations have or are givensome basic knowledge of the workings of the city, town or rural economy. A resource review is a necessary input to the strategy, and should include theidentification of financial, human and other capital resources that can contributeto the LED strategy. Working groups and steering committees can be establishedto ensure that both formal and informal structures are in place to support strategydevelopment and implementation. Other issues that need to be tackled in the earlystages include establishing LED staff teams and suitable political processes. Local ownership involving all groups is essential for successful LED
  12. 12. Page 12 Toolkit for Local Economic Development Each community has a unique set of local attributes that can advance or hinderlocal economic development. These include its economic structure, its humanresource capacity to carry out economic development, and how conducive the localgovernment investment climate is to economic and business activity. The aim of thelocal economy assessment is to identify the community’s strengths and weaknessesincluding its human resource capacity, local government’s ‘friendliness’ to all typesof business activities from corporate to informal, and the opportunities and threatsfacing the local economy. The goal of the assessment is to create an economic profile of the communitythat highlights the basis of its comparative and competitive advantage in relationto neighbouring communities and other regional, national or internationalcompetitors. As part of the LED strategy, a shared economic vision for the community andLED goals, objectives, programs, projects and action plans will be developed. Thisprocess ensures that all major stakeholder groups are given the opportunity to definewhat is to be achieved, how it is to be achieved, who will be responsible and thetimeframes associated with the implementation of the LED strategy. ������������������ ��������� ������������������ ���������������� ���������� ���������������������������������������� �������������� ���������������������� ���������������������������������� �������������������������������������������������������� ������������������ ���������������������� ��������������������������������������������������� ���������� Most importantly, the LED strategy and action plans must be finely assessedagainst the staff resource capacity to carry them out, as well as the budgetaryconstraints. Ultimately, the strategy’s action plans should be incorporated into thework and budgetary program of the local authority, and appropriate elements takenon by other stakeholders (business associations, utilities, educational institutions,etc.). The aim is to leverage strengths, overcome weaknesses, exploit opportunitiesand deal with threats. Strategy implementation is driven by the LED action plans. Ongoing monitoring
  13. 13. Toolkit for Local Economic Development Page 13is provided through the formal structures identified and created in step one, andevaluation of specific project outcomes ensures that the strategy continues to leadto the achievement of the LED vision, goals and objectives. In undertaking strategyimplementation, it is important to identify and establish the appropriate institutionsto carry out the plans. Good monitoring and evaluation techniques help to quantify outcomes, justifyexpenditures, determine enhancements and adjustments, and develop good practices.This information also feeds into the review of the complete LED strategy. The LED strategy should be reviewed at least annually to ensure that it remainsrelevant. It may be that conditions have changed or that the initial assessment wasincorrect to the local conditions. The LED strategy should evolve continuously torespond to the ever changing competitive environment Components And Variations Within An LED StrategyBy actively reviewing their economic base, communities gain an understanding ofthe opportunities for, and obstacles to, growth and investment. With this newfoundunderstanding, communities attempted to expand their economic and employmentbase by devising and undertaking strategic programs and projects to removeobstacles and facilitate investment. Today, local economies face an even greater setof challenges at the international, national, regional and local levels.
  14. 14. Page 14 Toolbox for Local Economic DevelopmentInternationalGlobalization increases both opportunities and competition for local investment. Itoffers opportunities for local businesses to develop new markets but also presentschallenges from international competitors entering local markets. Multi-site, multi-national manufacturing, banking and service corporations compete globally to findcost efficient sites in which to locate. Technologically advanced growth industries require highly specialized skills anda supporting technology infrastructure, but increasingly all industrial and servicesectors needs highly specialized and specific skills and business environments.Local conditions determine the relative advantage of an area and its ability to attractand retain investment. Even small towns and their surrounding rural regions candevelop local economic opportunities at a national or international level by buildingon their local economic strengths.NationalAt the national level, macro-economic, fiscal and monetary reforms directly impactthe economy at the local level. National regulatory and legal frameworks such astax reform, telecommunications deregulation and environmental standards directlyinfluence the local business climate, either enhancing or reducing the potential forlocal economic development. In many countries, national government functionscontinue to be decentralized thereby increasing the responsibility of municipalgovernments to retain and attract private industry.RegionalCommunities within and between regions often compete to attract external and localinvestment. Opportunities exist for communities across regions to collaborate witheach other to help their economies grow, for example, by supporting infrastructureor environmental improvements that demonstrate a broad regional impact. Anassociation of local municipalities or regional governments can serve to facilitatethese types of LED effort by acting as an intermediary between national andmunicipal governments. Metropolitan and Municipal Businesses, both large and small, often choose to locate in urban areas becauseof agglomeration economies (i.e., the benefits derived from sharing markets,infrastructure, labour pools and information with other firms). The economicadvantage of urban areas depends significantly on the quality of urban governanceand management, and on the policies affecting the availability, or lack, ofelectricity, transport, telecommunications, sanitation and developable urban land.Factors affecting labour productivity in the local economy include the availability
  15. 15. Toolkit for Local Economic Development Page 15and quality of housing, health and education services, skills, security, trainingopportunities and public transport. LED infrastructure comprises two main components, ‘hard’ physical infrastructureincorporating roads, rail, water, sewerage and drainage systems, and energy andtelecommunications networks; and ‘soft’ infrastructure of social, cultural andcommunity facilities and capacity that enhance the quality of life and encourageindustry and business development. ‘Hard’ and ‘soft’ infrastructure factors are major determinants of a community’srelative advantage. The quality and provision of ‘hard’ and ‘soft’ infrastructureforms the cornerstone of a successful local economy. Metropolitan areas can offerincreasing opportunities through economies of scale and effort as a result of the sizeof the physical and human capital available, as well as the size of its services andinternal market. Uncoordinated and disparate institutional frameworks and planning bodiesin metropolitan areas can serve to undermine area-wide economic growth.Metropolitan-wide LED agencies, consortia and networks can be created to addressthese constraints. These innovative institutional frameworks, which represent theinterests of different municipalities and partner agencies in the same metropolitanarea, can bring benefits to the key actors of each municipality (public departments,business and civil society organizations). These frameworks can serve to unitethe efforts of different localities and increase LED results, and can strengthenrepresentation in higher levels of decision-making. This type of cooperation hasworked well for cities that belong to common market agreements or that havecommon sector interests (i.e. Eurocities, Indonesian City Network, South AfricanCities Network). The most important and effective local economic development activity that amunicipality can undertake is to improve the regulatory processes and proceduresto which businesses are subjected by the municipality itself. A survey of mostmunicipalities would reveal a number of complex, poorly managed, expensive andunnecessary business registration systems. By reducing these, a municipality canquickly improve its local investment climate.
  16. 16. Page 16 Toolkit for Local Economic Development Disadvantaged Populations and Informal EconomyIn many countries, economic growth is determined not only by the formal economy(the economic sectors that are legally registered and pay taxes) but also by theinformal economy (those activities that are not legally registered). In some casesthe size of the informal economy is greater than the formal economy, and it interactswith the formal economy by supplying certain goods and services. The linkagesbetween the formal and informal sectors of the economy need to be understood andconsidered in devising a local economic development strategy. Communities and businesses increasingly recognize that a successful localeconomy requires social, as well as economic, environmental and physical renewal.In many cities, large numbers of low-income families work within the informaleconomy. However, these informal activities are often low-growth activities as aresult of a lack of access to proper infrastructure and services (i.e., electricity, water,and roads), regular means of financing, information and skills. The development of an LED strategy should recognize and accommodate theconstraints and opportunities of the informal economy so as to broaden the appeal ofa strategically planned LED strategy. It should also encourage wider social benefitsfor all a community’s economic and social sectors, both formal and informal,disadvantaged and excluded.
  17. 17. Toolkit for Local Economic Development Page 17 Do a drawing to show how you understand LED
  18. 18. Page 18 Toolkit for Local Economic Development Do you agree with trade barriers being reduced? Write down points for and against free trade._____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ What challenges are there in LED for your local municipality?______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
  19. 19. Toolkit for Local Economic Development Page 19 CHAPTER 2 UNDERSTANDING THE POLICY CONTEXT FOR LED • Knowledge of the constitutional and statutory mandates for LED • Defining responsibilities of councillors for Local Economic Development – distinguishing the roles of councillors and officials in municipalities • Issues that district councillors need to be aware of in working to support LED • Understanding what district municipalities can do to stimulate the Local Economy by examining the extent and nature of what can be done to create jobs from the local level.
  20. 20. Page 20 Toolkit for Local Economic DevelopmentThe role of local government in development comes from Section 152 of the SouthAfrican constitution.The Constitutional ProvisionsSection 152 (1) c states that one of the objects of local government is to promotesocial and economic development. Expanding on the developmental duties ofmunicipalities, Section 153 goes on to state:“A municipality musta. structure and manage its administration, budgeting and planning processes, to give priority to the basic needs of the community and to promote the social and economic development of the community; andb. participate in national and provincial development programmes.” (1)These objectives are further articulated in the Municipal Systems Act 32 of 2000.The stated priority function of this Act is “To provide for the core principles,mechanisms and processes that are necessary to move progressively towardsthe social and economic upliftment of local communities…” and more so “toprogressively build local government into an efficient, frontline development agencycapable of integrating the activities of all spheres of government for the overallsocial and economic upliftment of communities”… The primary means to give effect to these developmental roles is by undertakingdevelopmentally-oriented municipal planning which should ensure progress towardsSection 152 and 153 of the constitution (Chapter 5, sub-section 23, MunicipalSystems Act). Thus the Integrated Development Plan (IDP) of each municipality isintended to reflect a “single inclusive and strategic plan for the development of themunicipality which links, integrates and co-ordinates plans and takes into accountproposals for the development of the municipality”. Components of an Integrated Development Plan (IDP)An IDP must contain• a vision for the municipality’s long term development emphasising most critical development and internal transformation needs• an assessment of existing levels of development including identification of communities lacking basic municipal servicesSource:(1) Municipal Systems Act 32 of 2000
  21. 21. Toolkit for Local Economic Development Page 21• the council’s development priorities and objectives including LED aims and internal transformation needs• the council’s development strategies, to be aligned with national or provincial sectoral plans and planning requirements (legislated and binding)• a spatial development framework providing for land use management• operational strategies• disaster management plans Status of an IDPAn IDP• is the principal strategic plan with respect to planning, management and development• binds the executive authority of the municipality• binds all other persons with respect to their duties in the IDP and the rights of persons passed as a by-law. Chapter 6 outlines the establishment of a performance management system.Though not stated as such the PMS in theory, should reflect achievements of thetargets of the IDP. As part of the process of planning an IDP, local governments are intended todevelop a culture of community participation (through the establishment of wardcommittees). According to Chapter 4 of the Municipal Systems Act, a municipalitymust encourage and create conditions for the local community to participate in thepreparation, implementation and review of its IDP, its PMS, the monitoring andreview of its performance, budget preparation and strategic decisions relating to theprovision of municipal services. In addition, municipalities should“contribute to building the capacity of• the local community to enable it to participate in the affairs of the municipality; and• councillors and staff to foster community participation; and• use its resources, and annually allocate funds in its budgets, as may be appropriate for the purpose of implementing (a) and (b) above.” (2) This toolkit can be treated as one component that would be fitting in termsof the provisions of the Act as quoted above. The Act goes on to stipulate theSource:(2) Municipal Systems Act 32 of 2000
  22. 22. Page 22 Toolkit for Local Economic Developmentobligations with respect to mechanisms, processes and procedures to includecommunity participation ensuring the inclusion of those who are illiterate,disabled or disadvantaged by gender or other causes. There are thus provisions forcommunication and notifications and admission to public meetings. Another relevant development reference in the Act relates to local governmentbuilding its capacity to perform its functions. This means that municipalities needto ensure that councillors and officials understand the policies relating to LED. Therecently released, “Stimulating and Developing Local Economies” (dplg, 2006)presents the National Framework for LED in South Africa. The provisions of thisframework document will be expanded below. The reference to building its capacity also means that it is of prime importancethat municipalities and metros employ officials that are trained in LED. They alsoneed to employ technical professionals who can undertake key responsibilities inurban and regional planning and studies in working out the competitive advantagesof local economies. In cases where such expertise does not exist, municipalities cancontract in researchers and planner with the appropriate skills. Sub-section 74 of the Municipal Systems Act states that “provision may bemade for the promotion of local economic development through special tariffs forcategories of commercial and industrial users.” It must be remembered of coursethat increasing tariffs increases the taxes and costs for businesses which in the longrun could impact on their competitiveness. This suggests that municipalities needto be creative about how to fund LED. (See Chapter 7 of this toolkit for details ofdifferent sources of funding for specific LED projects and programmes.) It would be useful to note at this stage, that the major function of local governmentin LED is to ensure that appropriate, user-friendly and fully functional infrastructureexists to promote business development in the local area. The maintenance andconstruction of infrastructure are funded mandates of local governments. Furthermore, the central role of local government is to facilitate LED, which meansthat it should hold consultative meetings and engage in planning and joint researchprocesses on how to promote the local economy. Holding meetings and supportingresearch processes are not major cost items relative to the budgets available to mostmunicipalities. The importance of community liaison is reiterated in the Municipal StructuresAct (117 of 1998). Sub-section 19 stipulates that a “council must strive within itscapacity to achieve the objectives set out in section 152 of the Constitution. In view of this councils have to annually review the needs priorities and participatory
  23. 23. Toolkit for Local Economic Development Page 23mechanisms of the communities they serve while also reviewing their own deliverymechanisms and performance in meeting their constitutional objectives. The National Framework for LED in South AfricaThe most important source for dplg’s recommendations on LED are contained inthe National Framework for LED in South Africa. (3) Flowing from the evolving practice of LED described above and the South Africannational context described below, there are nine (9) principles identified that guidethis framework. These are:• Through a developmental approach, Government has a decisive role to play in shaping the economic destiny of our country.• Local Economic Development is an outcome of actions and interventions resulting from local good governance and the constant improvement and integration of national priorities and programs in local spaces.• Inward investment from the state or private sector will only be effective where the potential and competitive advantages of each area are known and exploited.• Promoting robust and inclusive local economies requires the concerted, coordinated action of all spheres and sectors of government centred on the application and localisation of the principles espoused in the National Spatial Development Perspective (NSDP).• Locally owned appropriate solutions and strategies must emerge to support national frameworks in both rural and urban local spaces and should promote sustainable development and sustainable human settlements.• South Africa competes in a global and increasingly integrated world economy whose threats must be minimised and whose opportunities must be exploited.• Private companies, including social enterprises and cooperatives, form the heart of the economy and have a crucial role to play as partnerships with public and community role players that will ultimately stimulate robust and inclusive local economies.• People are the single greatest resource and including all citizens in development and increasing their skills through greater role playing leads to increased opportunities for stimulating local economies.• Local initiative and responsibility, energy, creativity, assertive leadership andSource:(3) National Framework for LED in South Africa, plg, 2006, page 4
  24. 24. Page 24 Toolkit for Local Economic Development skills will ultimately unlock the latent potential in local economies and will shape local spaces. The framework states (4) that the objectives and anticipated outcomes of LEDare:Objectives of the framework:• To shift towards a more strategic approach to the development of local economies and to overcoming challenges and failures in respect of instances where municipalities themselves try to manage a litany of non-viable projects or start-ups.• To support local economies in realising their optimal potentials and making local communities active participants in the economy of the country.• To elevate the importance and centrality of effectively functioning local economies in growing the national economy.• To wage the national fight against poverty more effectively through local level debates, strategies and actions.• To improve community access to economic initiatives, support programmes and information.• To improve the coordination of economic development planning and implementation across government and between government and non- governmental actors.• To build greater awareness about the importance and role of localities and regions which globally are playing an increasingly significant role as points of investment facilitated by supportive national policies.Outcomes of the framework over the five years:• Analysis of the 52 district and metro municipal economies undertaken and shared understanding across government of the challenges and potentials of these areas developed.• The competitive advantage of all District and Metro municipalities are identified, incorporated into its LED strategy and exploited.• All District and Metro municipalities have credible LED programs, which are being effectively implemented by a dedicated local economic development unit or similar entity.• All Local Municipalities have at least one staff member (at least qualified through the LGSETA LED Learnership) dedicated to coordinating inputs that strengthenSource:(4) National Framework for LED in South Africa, dplg, 2006, page 5
  25. 25. Toolkit for Local Economic Development Page 25 the local economy.• The implementation of the IGRF Act and the effective utilisation of IGR structures occur to encourage and facilitate discussion and joint economic planning among municipalities and with Provincial and National Government.• All municipalities have innovative spatial development strategies, land-use polices, by-laws and implementation capacity to facilitate fast and effective business establishment and functioning, especially for informal/street traders, and SMEs.• All municipalities have at least one public-private partnership through which a major investment is being implemented.• A national excellence centre for monitoring, learning and research in local and regional economies is established. The role of national government in the framework is to set the scene for localeconomies to make decisions that will promote prosperity on the ground. Thus thefocus is on enabling local leaders, communities, businesses, NGOs, organised labourand other organised groups to realise their collective objectives. In this context, thestate sees its role as facilitator, networker, and monitor. There is recognition thata pure market solution is not likely to absorb labour or reduce poverty. Thus LEDefforts are expected to design solutions which national and provincial governmentwill work to support. Municipalities are to play a connector role in LED mobilising resources fromnational government departments. E.g. funds for skilling can be drawn from theSETAs and support can be obtained from SEDA to assist with the growth andretention of enterprises in their areas. There are also NGOS which can be tappedinto for resources. Municipalities are not intended to run programmes but to create platforms forbuilding partnerships and networking. LED is an important instrument for putting the “peoples’ contract” into action:• a territorial concept assuming synergy and partnership among local stakeholders• through LED people can work towards sustainable growth and development that improves the quality of life• LED can be the implementation component of a range of government policies e.g. the Microeconomic Reform Strategy, (MERS), the National Spatial Development Programme (NSDP) and the Expanded Public Works Programme (EPWP)
  26. 26. Page 26 Toolkit for Local Economic Development The metros themselves must be capacitated fully to understand the opportunitiesarising from the policies and instruments provided by national and provincialgovernments. Visions of LEDThe definition of LED by the World Bank implies that it is primarily a processby which public, business and non-government sectors work together to create anenabling environment for economic growth and employment creation to improveeveryone’s quality of life. Practicing LED means:• Improving economic capacity to improve the future of the local economy; and• Increasing the productive capacity of local industries, mines, farms, firms, entrepreneurs and workers to improve and build competitive strength. A strong economy can be built by identifying local strengths and threats. Thestrengths of the local economy will form the basis for an LED strategy. Eachcommunity can then undertake a collaborative process to act on its strengths,weaknesses, opportunities and threats (SWOTs) and build the attractiveness of itsarea. Successful private enterprises (and productive public-private partnerships) createwealth and this depends on favourable local conditions. Local governments thushave an essential role in creating favourable environments for business successthrough its partnership among itself, business and community interests. While local government has a role in socio-economic development, it is notdirectly responsible for creating jobs. Rather, it should take active steps to create anenvironment in which sustainable jobs can be created. Every effort must be made at national level to ensure that there is access tofinance in the form of loans or loans mixed with grants, to enable small producersto establish and grow their businesses. Negotiations should be held with banks todeliver on the provisions of the Financial Sector Charter. At the same time the newlegislation to permit local co-operative and dedicated banks for savings and creditmust be accelerated. The National LED Forum should work towards co-ordination of funding andfinance for LED and creation of multi-sourced funding streams and also improvesustainable access to investment finance to build local competitive advantage.Source:(5) Primer on LED, World Bank, 2006
  27. 27. Toolkit for Local Economic Development Page 27 Provinces, through their development agencies, must play a role in seeking tofacilitate finance for small producers, either directly or through agreements withfinance institutions. The metros themselves must be capacitated fully to understand the opportunitiesarising from the policies and instruments provided by national and provincialgovernments.Bibliography:Constitution of the Republic of South AfricaMunicipal Systems Act 32 of Primer on LED, 2006
  28. 28. Page 28 Toolkit for Local Economic DevelopmentWhat are the implications of the above legislation and policies for you?______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________What specific tasks and roles do you have to take on?____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
  29. 29. Toolkit for Local Economic Development Page 29 CHAPTER 3 THE BUILDING BLOCKS OF LED STRATEGIES • Understanding the local economy – its sectors and resources • Strategic choices which promote or hinder poverty and job creation • Identifying competitive advantage in the country, region, district and local municipality • Understanding concepts such as value addition, multipliers, leverage, backward and forward linkages, complementarities (of labour) and clustering. • Fleshing out opportunities for job creation and increased community involvement in infrastructure and private sector development e.g. subcontracting and tendering • Identifying the major blockages to investment and poverty reduction
  30. 30. Page 30 Toolkit for Local Economic Development Understanding the local economy – its sectors and resourcesEconomics studies the uses of resources that are available, how we use them and theallocation of the gains from production and services across society. In any society,country and local economy, there are varying degrees of resources. Resourcesare scarce commodities that have to be managed and safeguarded if society is tocontinue gaining benefits from their use, e.g. water, minerals, soil and oil.There are three basic resources: land, labour and capital. We use land to producefood and inputs into industrial production. Where land has minerals we mine it foruse in industry and for other uses. We apply labour to produce goods and servicesfor markets. We use capital, money and machinery to buy things that are needed forproduction and services and to pay labour. The method of production that we useis the technology.Technology: In early economic thinking, technology was considered as theinteraction between labour and capital. In the last forty years as computers andmachinery have become more sophisticated, technology has become a factor ofproduction. The increasing use of technology has led to a decline in the use oflabour around the world. This is one of the key reasons that unemployment hasincreased.Infrastructure: Another key resource in industrial and economic developmentis infrastructure. Industries, farms and mines cannot function without access toreliable “hard” infrastructure. This means that electricity, water and sanitationservices, refuse removal and transport infrastructure are an integral part of theability of the economy to function well and to grow. The recent power failures inthe Western Cape are an example of how breakdowns in infrastructure can causelosses in industrial production. Planners need to make sure that infrastructure workswell for current needs and also has excess capacity to cater for growth.Land: Closely aligned with infrastructural needs is the availability of sites andzoning for industries, processing, trade and service activities in the economy.As local government plays a key role in deciding on land use management andregulating land use, spatial planning is a critical input into LED. Technology Land Goods and services Labour produced by the Capital economy Infrastructure
  31. 31. Toolkit for Local Economic Development Page 31Skills: The extent of skills available in an economy is often a key determinant ofemployment levels. Skills have risen in importance to the point where we nowspeak of a ‘knowledge economy.’ Theskills however have to be applicable to For example: Food, clothing andthe types of employment opportunities housing for the mineworkers, engineers and others, people to maintain andthat are available. E.g. where there repair machinery and equipment, etc.are minerals, the skills required arein mining engineering, geology andeconomics. In addition, mines will need construction skills to construct and propunderground tunnels, machinery and skills to transport minerals. Alongside thesekey skill areas, there will be a need for a range of support services. The same logic can be applied to the use of land for agriculture or of natural andcultural resources for tourism. In each sector, there are a host of goods and servicesthat are needed alongside the lead sector to provide for the needs of industry andhouseholds. It is also important to note that resources have to be renewed and have a lifespan,i.e. mines only have a limited amount of minerals to be extracted and land has to beregularly fertilised to continue being productive or there has to be rest periods in theuse of land or rotation of crops and grazing to keep the ground productive. The presence of natural, human and cultural resources, along with thecapital and technology to use for the benefit of society, are the major factorsin working out the lead sectors in any economy. e.g. If an area has arable landit could be suitable for some types Think of a sector as a field ofof agriculture. The use of the term, specialised activity in an economy.‘some’ suggests that certain types land Thus agriculture, mining, tourism,is suitable for specific types of crops construction, etc are all areas ofor animal rearing. The potential for specialisation.agriculture is dependent on water thatis available, the costs of piping water and the availability of farming knowledge,seeds and farming equipment. The presence and efficient use of natural or other resources become the source ofcomparative advantage in an economy. This brings us to another essential link for successful producers; there have to bemarkets or effective demand to sell the goods. The more the demand the strongerare the opportunities for growth in any sector. Growth in one sector leads to growthacross other sectors. When we measure growth across an economy, we calculate thepercentage change in performance from one period to the next.
  32. 32. Page 32 Toolkit for Local Economic Development Thus when we work on growing an economy, we think about ways in which wecan identify where and what types of demand or needs exist and how we can meetthose needs. Meeting needs and seeking more and different markets implies that we have to beable to produce better quality at lower prices in order to compete on local, nationalor international markets. Our choice of market decides the extent of demand thatwe can cater for. However, as we mentioned earlier, we live in a world wheretrade barriers have all but dissolved. Goods and services are reaching countriesacross great distances. E.g. Kenyans are growing vegetables which are being usedto make salads that are sold fresh in supermarkets in London the morning after thevegetables have been picked and the salads made. Small scale Kenyan farmers haveidentified that Indians like certain types of vegetables. As Indian technical peopleand business owners now reside in many different places in the world, they growthese vegetables and they are flown to places where Indian markets exist. As land isscarce and labour is expensive in Europe, Kenyans are also growing flowers whichare being exported to Europe. These examples illustrate that opportunities for niche markets exist in manyforms that may not be immediately visible to us. Niche markets may be large orsmall though their success depends on A niche market is one where specialthe buying power of the market that is tastes are catered for or specialisedtargeted or the size of industry to which services are required.the market is linked. It also shows usthat where resources and skills exist, it is possible to diversify into markets we maynot have imagined. Another example in this context is the increase in business process outsourcing.Outsourcing refers to handing over some parts of a production or service to anothercompany. Companies do this as means of building specialisation and efficiencywhich simplifies management and thereby can also reduce costs. One growing example of outsourcing is the use of call centres to provide informationand perform IT and telecommunications services which customers require. Thusbanks, insurance companies, medical aids, revenue services and even municipalitiesare increasingly using call centres to cater for aspects of customer needs. Again aspeople are highly skilled which leads to high labour costs, companies in Europeand the United Kingdom are outsourcing their call centre functions to countrieswhere labour costs less. As result, some British banks have call centres in India. InSouth Africa, call centres have become a growing area which is creating significantnumbers of new jobs. The need for call centres depends on the extent of scale. Scalerefers to the numbers of customers a business has.
  33. 33. Toolkit for Local Economic Development Page 33 Thus far we have established that Comparative advantage refers to theidentifying the primary resources in combination of factors that people oran economy gives us information economies have that places them in aabout potential lead sectors. We have stronger position. Thus a local economyalso established that the linkages with more technically skilled people inand efficient use of capital (money a local industry using local resources has a comparative advantage in thatand machines), natural resources, particular industry.labour (knowledge), technologyand infrastructure are key factors inbuilding up comparative advantage in an economy. In the illustration below, production factors are used by firms and households to Households Waste Factor markets Prices Goods markets Firmsproduce goods which are exchanged in markets. While comparative advantage is a useful starting point it is not necessarily aguarantee of success. As we live in a world with high levels of competition, we needto build competitive advantage, i.e. be more efficient at producing the same goodsand services at better prices and quality than other economies. This will enable us tobuild competitive advantage. We will explore this further in a later section. When we think about developing local economies, it is useful to think about building livelihoods rather than just creating jobs. Employment gives people an income. We need more than just to be able to earn a living. A healthy society considers and creates the means for people to enjoy a healthy lifestyle and be able to grow themselves in a variety of ways. This would include facilities to learn, play, be entertained, socialise, pray, be healed and participate in creating a community in which we believe. The presence of these facilities creates jobs and more importantly, attracts people and investment.
  34. 34. Page 34 Toolkit for Local Economic Development Strategic choices that will promote or hinder poverty and job creationAn economy is able to produce or render services with the resources it has available.Therefore a starting point for understanding the advantages we have is to assess theresources that we have available and who wants to buy them from us. Here ourperception of resources in the context of local economies starts to become broaderthan the basic resources we identified above. When thinking of resources in a local economy we should therefore considerthe social, human, natural, physical, and financial resources that we have in aneconomy. These are explained in Table 1.Table 1Social Resources Social resources refer to schools, hospitals, policing, social services, organised community groups, churches (and other places to worship), social and entertainment facilitiesNatural Resources Natural resources are features which occur in nature: land for grazing and cultivation, minerals or natural features which will attract visitorsHuman Resources Human resources or human capital is measured by the extent of skills that are present in an economy and the skills to provide social servicesPhysical Resources Physical resources refer to the buildings, housing, social facilities and different types of infrastructureFinancial Resources Financial resources includes the range of financial services that people living in an area require as well the instruments and finance required by businesses and government Thus if an assessment of resources available to a local economy is being conducted,the above resources should be included along with the sectors that dominate in theeconomy and the extent of economic activity in the area. While an area may have extensive natural resources which promote activity inmining, tourism or farming, the extent of skill in combination with other resources,in the area determines the extent of exploitation of those resources that is possible. The use of labour versus equipment in a sector or industry determines the extentof job creation that is possible. Thus we differentiate between more and less labourintensity in certain sectors. E.g. the use of earth moving equipment in constructionminimises the use of labour. It is technically possible to select techniques thatpromote or hinder the extent of labour intensity. This however should be balancedagainst efficiency, or time taken to accomplish some functions. It is not always prudent to substitute labour for machines as this could affect the
  35. 35. Toolkit for Local Economic Development Page 35competitiveness of products or services. If a bank teller had to calculate manuallyevery time a transaction was conducted, the queues in banks would be much longer.It is also safer for customers that transactions are recorded electronically as theydone. In short we have to examine the choices carefully to suit the task, the natureof the product and the markets for which they are intended. In a number of cases, NGOs and private businesses are working with ruralcommunities to produce mementos for tourists. These tend to be labour intensiveand can earn regular income. But if we consider that the tourist market is a limitedone and we work out ways to improve the standards and methods of production,their goods could be used to seek international markets. There are cases wherethis is occurring in the country. If the same producers also diversify the productrange into more utility or domestic items, the markets can be extended even further.With a local cultural flavour added to goods, they sell the South African brand andmake use of global or much broader markets. This is how we can capitalise onglobalisation. In cases where local producers are given the opportunity to acquire internationalproduction standards (through the SABS – South African Bureau of Standards), theystand stronger chances of integrating into broader local, regional and internationalmarkets. Another area where local governments can support job creation is to combineinfrastructure development with skills programmes. This has been the norm on largescale projects where local businesses are taught how to become building contractingcompanies who are able to tender for further work after the life of the initial project.A possible addition to this process is the training of artisans. As larger companiesmanage the construction of infrastructure, and these projects extend over a fewyears, artisans can be given the skills, experience and qualifications through the lifeof these projects. Engendering qualifications enables people to find better payingjobs or to create their own employment with additional business management andmarketing skills. It is important to remember that skills are valuable in assessing competence in aneconomy but it must be noted that the more the skills are linked into the dominantsectors in the local economy, the stronger the chances of building that economy.It is also useful to not that for every skilled job other jobs are created, e.g. when aperson is trained as a bricklayer and is employed there are jobs for brick makers,concrete mixers, transporters and others. This is known as complementary jobs.
  36. 36. Page 36 Toolkit for Local Economic DevelopmentIdentifying competitive advantage in the country, region, district and local municipalityThe concept of value addition is useful to consider at this stage. E.g. South Africamines a variety of precious metals and semi-precious stones. The extent of processingthese stones and metals varies across the value chain. Some semi-precious stones arecut and polished in different countries in Asia and exported to other countries in theworld. This is due to the Asian countries having a competitive advantage in cuttingand polishing skills and technology. If we could develop the skills and acquire thetechnology locally and sell at prices which could compete with Asian producers, wecould build competitive advantage in the semi-precious stone market. In order to identify the competitive advantage of each segment (country, region orlocal) the structure of the local economy must be understood. This is best done byconducting a comparative analysis of towns or cities in order to determine whetherthe town’s economy is relatively specialized, and changes in the local economy’sGross Geographic Product will indicate whether the town is growing or declining.On the other hand, changes in employment within each sector that contributes toeconomic output will highlight any imbalances between sectors. Other variables that can be considered include changes in the number ofestablishments per sector, the size and class of firms per sector and the number andcontribution of SMMEs to economic output by sector and size class. This will givean illustration of the economic prominence of each sector and class size. Local and regional-level analysis is an important ingredient for long-term strategybuilding and planning. Structured analysis with regard to trends, potentials, threatsetc. is specifically important when looking at the bigger region and should be morethan just a summary or aggregation of local-level analysis. In some places regional planning and management instruments are used by thepublic sector (e.g. the district IDPs in South Africa). The use and results of theseanalyses should be made an integral part of the preparation for and understandingof competitive advantage. Value chains, backward and forward linkages, complementarily and clusteringA value chain refers to activities undertaken to bring a product from its conceptionto its end use and beyond. This includes activities such as input provision, design,production, marketing, distribution and support to the final consumer. In someinstances few firms in the link control certain links in the chain. In other cases many
  37. 37. Toolkit for Local Economic Development Page 37firms provide different functions or links in the chain. Activities can be containedwithin a single geographical location or spread over wider areas or even continents.One link in the chain can represent thousands of firms or could refer to one firmonly. Value chain analysis, cluster analysis and sub-sector analysis look at the competitiveness of local firms in certain sectors and value chains. Value chain analysis, cluster analysis and sub-sector analysis are often used interchangeably, and they often use similar methods or instruments for analysis. Despite the similarities they are still recognized as distinct fields in development. This being said, ideas, concepts and instruments are constantly flowing between these fields.A Simple Value Chain: Dairy Farming Milk Butter Cheese Exports to other regions and Cattle Feed Packaging Transport countries The illustration above shows us how diary farming can lead into value additionactivities in the production of milk, butter and different cheeses. There are alsocomplementary activities which are stimulated through packaging industries andspecialised transport services which are required. Value chains are an important means of linking rural or small firms with regionalor global markets. Small and rural firms are increasingly under competition fromglobal firms that are part of or supplied by highly organized value chains, as theyare often unable to organize themselves in an efficient way to be able to respond toincreasing competition from better organized value chains. From a local and regional perspective, value chains deal with the way small firmsinteract and form part of the bigger economic systems. The terms value chains or sub-sectors are often used interchangeably. Sub-sectoranalysis is the methodology by which the structure and processes of a sub- sectorare understood. A key concept within sub-sector analysis is leverage; that smallfocused inputs can generate commensurately larger outputs. This recognizes thatdevelopment agencies cannot afford to work with small firms on an individual basisand that therefore they must seek to make interventions that can influence largenumbers of firms with a single stroke. Value chain analysis or VCA also has strong links to the approach of clusterdevelopment. The concept of clusters as a “sectoral and geographical concentrationof enterprises” is described by Michael Porter in his book, the Competitive
  38. 38. Page 38 Toolkit for Local Economic DevelopmentAdvantage of Nations, as “geographically close groups of interconnected companiesand associated institutions in a particular field, linked by common technologies andskills. They normally exist within a geographic area where ease of communication,logistics and personal interaction is possible. Clusters are normally concentratedin regions and sometimes in a single town”. From the definition above it becomesapparent that cluster and sub-sector analysis is closely related, and that a clusterscan also form part of a value chain. Understanding the concepts of value chains, sub-sectors and clusters will allowfor development of strategies that promote inter-firm cooperation to collectivelyimprove the efficiency of participating enterprises. Clustering and networking is particularly pursued in response to competitivenessconstraints arising from small firm size, resulting in:• Cost sharing and participating for more effective innovation and research and development or R&D• More effective advocacy (influencing policy making) and buyer/supplier negotiation• Improved access to inputs and services• More efficient marketing and market access opening possibilities for increased specialisation Value chains and sub-sectors have potential to improve technology for somecomponents or the upgrading of certain parts of the system, resulting in increasedopportunities. This has further potential for unlocking opportunities in niche marketsor switching from one industry to another more profitable one. Examples can be agroup of manufacturers that switches to the profitable motor industry, or a group ofnurseries switch from traditional garden plants to medicinal plants.
  39. 39. Toolkit for Local Economic Development Page 39Value chain integration (5) INTERVENTION AREA KEY STRATEGIES & PROCESSES OPTIONS / WAYS TO IMPLEMENT Clusters Improve the competitiveness and Conduct a cluster assessment that performance of a given cluster in an investigates the information flows, area relationship, technology usage etc. Identify opportunities to upgrade or opportunities to share resources. Establish a network broker or joint resource centres Value chain Improve the performance of a group of Conduct a value chain assessment firms within a value chain through the that indicates product flow, information improvement of the value chain and relationships and supporting actors Analyze for opportunities and obstacles that can be addressed Sub Sector Improve the performance of a sub-sector Conduct a sub sector analysis to with a specific emphasis on small firms identify constraints and obstacles in order to stimulate growth Identify business services used in the sub-sector that could improve the performance further (see Business service cornerstone) Improve public support Identify the resource and infrastructure Develop special hard and soft to specific sub-sectors needs of the target sectors and mobilize infrastructure or clusters (see also the public sector to support them Promote special interests to other next cornerstone on government actors (e.g. Universities) Investment promotion) Create incentives for investment Creating networks or Connect businesses in order to create Identify a host organization that sector facilitators or economies of scale, or to optimize can act as a relationship broker and marketing body resource usage facilitator between businesse Identify potential markets and promote Develop a marketing body that products to them while at the same time promotes and markets the products of communicating market opportunities the sub-sector, cluster or value chain back to the sector component Strengthen the support Align supporting institutions and Involve and focus supporting to a sector or cluster business services to support growth institutions on growth opportunities in order to improve the and competitiveness Mobilize business service sector institutional layer around new opportunities Improve the visibility and Raise awareness of the sector to See next cornerstone branding of the sectors potential investors and to end markets Attract more supporting businesses and institutions to localitySource(5) Local Economic Development Strategic Planning and Practice Casebook, Cities of Change -World Bank
  40. 40. Page 40 Toolkit for Local Economic Development Porter’s Five Forces AnalysisAssessing the Balance of Power in a Business SituationThe Porter’s 5 Forces tool is a simple but powerful tool for understanding wherepower lies in a business situation. This is useful, because it helps us understand boththe strength of the current competitive position, and the strength of a position we’relooking to move into. With a clear understanding of where power lies, we can take fair advantage ofa situation of strength, improve a situation of weakness, and avoid taking wrongsteps. This makes it an important part of a planning toolkit. Conventionally, the tool is used to identify whether new products, services orbusinesses have the potential to be profitable. However it can be very illuminatingwhen used to understand the balance of power in other situations.How to use the tool: Five Forces Analysis assumes that there are five important forces that determinecompetitive power in a situation. These are: 1 Here you assess how easy it is for suppliers to drive up prices. This is driven by the number of suppliers of each key input, the uniqueness of their product or service, Supplier their strength and control over you, the cost of switching from one to another, and Power: so on. The fewer the supplier choices you have, and the more you need suppliers’ help, the more powerful your suppliers are. 2 Here we ask how easy it is for buyers to drive prices down. Again, this is driven by the number of buyers, the importance of each individual buyer to businesses, the Buyer cost to them of switching from your products and services to those of someone Power: else, and so on. If you deal with few, powerful buyers, they are often able to dictate terms to you. 3 What is important here is the number and capability of competitors – if there are many competitors, and they offer equally attractive products and services, then it is most likely that local business will have little power in the situation. If suppliers and buyers don’t get a good deal, they’ll go elsewhere. On the other hand, if no-one else can do what is done in your local economy, then there is tremendous strength. 4 This is affected by the ability of customers to find a different way of doing what you do – for example, if you supply a unique software product that automates an Threat of important process, people may substitute by doing the process manually or by outsourcing it. If substitution is easy and substitution is viable, then this weakens your power. 5 Power is also affected by the ability of people to enter the market. If it costs little in time or money to enter the market and compete effectively, if there are few Threat of economies of scale in place, or if there is little protection for key technologies, then New Entry: new competitors can quickly enter the market and weaken position of the local industry. If there are strong and durable barriers to entry, then the local industry can preserve a favourable position and take fair advantage of it.
  41. 41. Toolkit for Local Economic Development Page 41 These forces can be neatly brought together in a diagram like Porter’s FiveForces. (6) To use the tool to understand the local economic situation, look at each of theseforces one-by-one. Brainstorm the relevant factors for the local market or situation, and then checkagainst the factors listed for the force in the diagram above. Then look at the situation that is present using this analysis and think through howit affects your local economy. Bear in mind that few situations are perfect; howeveruse environmental scan as a framework for thinking through what can be donechange to increase power with respect to each force.Example:Dineo Mahlati is deciding whether to switch careers and become a farmer – she’salways loved the countryside, and wants to switch to a career where she’s her ownboss. She creates the following Five Forces Analysis as she thinks the situation(6) This tool was created by Harvard Business School professor, Michael Porter, to analyze the attractivenessand likely-profitability of an industry. Since publication, it has become one of the most important businessstrategy tools. The classic article which introduces it is “How Competitive Forces Shape Strategy” in HarvardBusiness Review 57, March – April 1979, pages 86-93.
  42. 42. Page 42 Toolkit for Local Economic Developmentthrough: This worries her:• The threat of new entry is quite high: if anyone looks as if they’re making a sustained profit, new competitors can come into the industry easily, reducing profits;• Competitive rivalry is extremely high: if someone raises prices, they’ll be quickly undercut. Intense competition puts strong downward pressure on prices;• Buyer Power is strong, again implying strong downward pressure on prices; and• There is some threat of substitution. Unless she is able to find some way of changing this situation, this looks like avery tough industry to survive in. Maybe she’ll need to specialise in a sector of themarket that’s protected from some of these forces, or find a related business that’sin a stronger position.Key points:Porter’s Five Forces Analysis is an important tool for assessing the potential for
  43. 43. Toolkit for Local Economic Development Page 43profitability in an industry. With a little adaptation, it is also useful as a way ofassessing the balance of power in more general situations. It works by looking at the strength of five important forces that affectcompetition:Supplier Power: The power of suppliers to drive up the prices of inputs;Buyer Power: The power of your customers to drive down prices;Competitive Rivalry: The strength of competition in the industry;The Threat of Substitution: The extent to which different products and servicescan be used in place of those in the local economy; andThe Threat of New Entry: The ease with which new competitors can enter themarket if they see that good profits are being made (and then drive prices down). By thinking through how each force affects a local economy, and by identifyingthe strength and direction of each force, it is possible to quickly assess the strengthof the position and ability to make a sustained profit in the industry. We can thenlook at how to affect each of the forces to move the balance of power more in favourof the local economy.Source:(7) www.mindtools.comFor more information on this tool, and on Michael Porter’s approaches to competitive analysis, read CompetitiveStrategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter.
  44. 44. Page 44 Toolkit for Local Economic Development Fleshing Out Opportunities for Job CreationWhen a competitive analysis is done, it shows up areas where local businesses canexpand and create clusters or add value. Making sure that the appropriate servicesand business support infrastructure is integral to building competitive advantage.Through these processes, local industry is more likely to build success and therebyincrease employment. AS the concept of clustering involves proximity, it is alsonecessary to ensure that the skills required to build efficiency, productivity andcompetitiveness are available in the local economy. When planning for expansionof local industry, it vital to project and make provision for the skilled personnel thatwill be required. As there are Sector and Training Authorities (SETAs) in SouthAfrica, it would be useful to engage the relevant SETA to identify the training andstandards that will be required to support industrial and other development. While the prosperity of local industry is essential in strengthening the economy,we need to think more broadly about ways to create jobs. You may recall that inthe first chapter we discussed how mechanisation has reduced the number of jobs inmany countries. Thus if we are to create jobs we need to look further. Other areas that have been mentioned and can be considered are:• Training local businesses to tender for government contracts• Involving local businesses in development of housing and infrastructure• Improving product quality among small scale producers• Accessing regional and international markets for local products• Involving training institutions in improving capacity of youth groups, crèche operators and other community structures• Working with casual labourers to identify private sector opportunities• Local government sub-contracting some services to small local businesses rather than external large businesses, e.g. renovations, cleaning, and maintenance If local procurement agencies brainstorm the various categories of goods andservices that are purchased, there could be numerous opportunities where localbusinesses could be employed. Rather than using inefficient suppliers, local businesssupport could be engaged to build competitiveness among local businesses.
  45. 45. Toolkit for Local Economic Development Page 45 Identifying the major blockages to investment and poverty eradicationInvestment is key to promoting growth and development in a local economy. Whena competitiveness analysis is conducted, opportunities for extending the value chainthrough new processing or other activities are likely to show up. In addition, spatialframeworks are likely to yield land that could be used for further development. In linking to areas of potential there are numerous LED strategies that municipalitiescan adopt that will result in the desired developmental outcomes of povertyeradication, job creation, the broadening or transforming of local economies, andthe redistribution of incomes. Some of the strategies which could be used are:• Linking profitable growth to redistributive development/financing.• Making explicit linkages between ‘living wages’, human capital development and productivity.• Development and maintenance of infrastructure and services.• Plugging the leaks in the local economy, and• Retention and expansion of existing businesses. The optimal LED strategy will vary depending on local circumstances and willin part reflect what has been inherited, for example apartheid era biases must beconsidered so as not to amplify the inherited patterns of the past. Considerationof constitutional mandates and political priorities must be taken into account.Municipalities should conduct sufficient research and consult broadly, garnersupport, buy-in and ownership from all stakeholders to ensure these issues havebeen adequately considered. The kind of LED approach that is implemented in any area will depend on theconditions of that particular area as well as reflect what has been inherited. Thusunderstanding of the local economy will require researching the local context, localeconomy and employment structure, local population and labour market1. Local context –looking at geographical and physical features beneficial or conducive to LED interventions and their significance regionally, nationally and internationally.2. Local economy and employment structure – detailing the nature and character of the local economy including employment base, dominant economic sectors (agricultural, formal, industrialised etc); levels of flexibility and diversification, support mechanisms, entrepreneurial climate.3. Local population and labour market – pertaining to demographic trends, incomes, quality of life, cultural characteristics and the interrelatedness of the sectoral,